There’s a new practitioner administering financial wellness to 401(k) plan participants. Personalized target date accounts (PTDAs) are artificial intelligence (AI) cyborgs with integrated circuits of robo advisors, managed accounts and target date funds (TDFs). PTDAs serve both defaulted and non-defaulted participants.
Defaulted participants
Defaulted participants do not want to engage, so all we know about them is what is on the recordkeeper’s platform. That’s the challenge.
All three PTDA cyborg circuits—robo advisors, managed accounts and TDFs—use glidepaths for lifetime investing. Most say they use academic theory, as published in 2007 and 2024. But unlike common TDF practice that is 85% risky at the target date (55% equities plus 30% long-term bonds), academic theory is very safe at retirement, with 70-80% in risk-free investments.
The challenge is that we don’t know what assets are held outside the 401(k) plan. Since the average tenure in a 401(k) plan is only 5 years, we can’t rely on assets in the 401(k) as a wealth guide. But we can estimate these outside assets and use a corresponding glidepath as shown in the following, where the assumption is that assets outside the 401(k) are safe, such as defined benefit plan assets:
Note that the glidepaths shown are U-shaped, re-risking in retirement. They are both “TO” (lowest equities at retirement) and “THROUGH” (serving for lifetime).
Here’s an example of an algorithm using current account balance that might be used by PTDAs to guide defaulted participants:
Once a PTDA identifies a glidepath, it uses the participant’s current age to locate an asset allocation, where the plan sponsor specifies a retirement year, like age 65. It’s important to note that retirement date is the actual month rather than a 5-year or 10-year cohort as provided in off-the-shelf TDFs.
Defaulted participants should be notified of the asset allocation that the PTDA has chosen, and they should agree or disagree. If they disagree (or refuse to agree), they are placed on the default glidepath chosen by the plan sponsor. We recommend the Conservative path.
That’s the mechanics for a defaulted participant. Non-defaulted (self-directed) participants are much more straightforward because they want to engage.
Self-directed participants
Self-directed participants manage their individual personalized glidepaths through time by choosing a risk level and a target date that they can change at will. It’s that simple.
Conclusion
There is an evolution underway in 401(k) investing that is being driven by AI. The most popular Qualified Default Investment Alternative (QDIA) is a target date fund, but these are one-size-fits-all-set-it-and-forget-it. The evolving improvements in artificial intelligence make personalization possible. This is brilliant because investing is personal.
QDAIs may become the most popular QDIA. Stay tuned.
SEE ALSO:
• The Right Way to Select a QDIA
Ron Surz is CEO of Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), and author of the book "Baby Boomer Investing in the Perilous Decade of the 2020s." TDS licenses target-date fund usage of Ron’s patented Safe Landing Glide Path® (SLGP) that actually protects beneficiaries as they approach retirement. Individual investors can follow the SLGP at Age Sage, an educational interactive website. The BBIS educates baby boomers on the risks and rewards in contemporary investing, and Ron’s book is a tour of these shows. He can be reached at Ron@TargetDateSolutions.com.